The Goldman Sachs Group, Inc.

Goldman Sachs Research

Shifting from policy accommodation to growth acceleration September 2013 Noah Weisberger Aleksandar Timcenko

Goldman, Sachs & Co. Goldman, Sachs & Co.

(212) 357-6261 (212) 357-7628

[email protected] [email protected]

This research is focused on industries and sectors. It does not attempt to distinguish between the prospects or performance of, or provide analysis of, individual companies within any industry or sector we describe. Any trading recommendation in this research relating to an industry or sector refers to the entire industry or sector and not to any individual company in that industry or sector. In addition, any trading recommendation relating to multiple positions in more than one industry or sector refers to the entire recommended trading strategy and not to any of the constituent positions in isolation. In particular, we are not recommending any individual security or an investment in any individual company, and you should not rely on this research in making an investment decision with respect to any individual company or security. You should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Wavefront® is a registered service mark of Goldman, Sachs & Co., and the Wavefront ideas, concepts and methodologies described herein are proprietary and patent pending.

Global GDP Growth Forecasts 2012-2016

% yoy

2011

2012

2013

2014

2015

2016

USA

1.8

2.8

1.5

2.9

3.2

3.0

Japan

-0.6

2.0

1.8

1.6

1.2

1.5

Euro Area

1.5

-0.5

-0.5

0.9

1.2

1.5

Germany

3.4

0.9

0.6

2.0

2.1

2.2

France

2.0

0.0

0.0

0.5

1.0

1.3

Italy

0.5

-2.4

-1.8

0.4

0.8

1.0

Spain

0.4

-1.4

-1.5

0.0

0.9

1.8

UK

1.1

0.2

1.4

2.3

2.5

2.7

China

9.3

7.8

7.4

7.7

7.8

7.8

India

7.5

5.1

5.4

6.7

7.2

7.5

Brazil

2.7

0.9

2.3

2.8

3.3

3.4

Russia

4.3

3.4

2.7

3.5

3.7

3.1

Developed Markets

1.7

1.4

1.0

2.2

2.4

2.5

Emerging Markets

6.9

5.5

5.4

6.0

6.2

6.2

World

3.9

3.1

2.9

3.8

4.1

4.1

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

2

Real GDP Growth: GS vs Consensus

% yoy

2011

2012

USA

1.8

Japan

2013

2014

GS

Consensus*

GS

Consensus*

2.8

1.5

1.5

2.9

2.6

-0.6

2.0

1.8

1.9

1.6

1.5

Euro Area

1.5

-0.5

-0.5

-0.6

0.9

0.9

UK

1.1

0.2

1.4

1.2

2.3

1.9

Brazil

2.7

0.9

2.3

2.2

2.8

2.7

China

9.3

7.8

7.4

7.5

7.7

7.5

India

7.5

5.1

5.4

5.5

6.7

6.3

Russia

4.3

3.4

2.7

2.3

3.5

2.9

BRICs Advanced Economies World

7.6

6.0

6.0

6.0

6.6

6.3

1.7

1.4

1.0

1.1

2.2

2.0

3.9

3.1

2.9

2.8

3.8

3.6

* Consensus Econom ics August 2013 Source: Goldm an Sachs Global Investm ent Research

Goldman Sachs Global Investment Research

3

Inflation: GS vs Consensus

2013 % yoy

2011

2014

2012 GS

Consensus*

GS

Consensus*

USA

3.1

2.1

1.6

1.5

1.8

1.9

Japan

-0.3

0.0

0.1

0.1

2.3

2.1

Euro Area

2.7

2.5

1.5

1.5

1.5

1.5

UK

4.5

2.8

2.6

2.7

2.4

2.5

Brazil

6.6

5.4

6.2

5.8

5.5

5.6

China

5.4

2.6

2.4

2.6

2.6

3.1

India

9.5

7.5

5.5

5.4

5.7

5.6

Russia

8.5

5.1

6.5

6.0

5.6

5.5

BRICs Advanced Economies World

6.8

4.2

3.8

3.9

3.8

4.1

2.7

2.0

1.4

1.4

1.8

1.9

4.3

3.2

2.8

2.8

2.9

3.0

* Consensus Econom ics August 2013 Source: Goldm an Sachs Global Investm ent Research

Goldman Sachs Global Investment Research

4

An Increase in Fiscal Drag, Then Relief

4.0

% of GDP

Fiscal Impulse US

3.0

Euro-4 (Germany, France, Italy, Spain) 2.0 Forecasts 1.0

0.0

-1.0

-2.0 2008

2009

2010

2011

2012

2013

2014

2015

Source: IMF, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

5

Moving Over the Hump of Fiscal Contraction Percentage points 0.5

Percentage points 0.5

0.0

0.0

-0.5

-0.5

-1.0

-1.0

-1.5

-1.5

-2.0 -2.5

Impact of Federal Fiscal Policy on Real GDP Growth: Tax Spending (Ex Sequester) Sequester

-2.0 -2.5

-3.0

-3.0 Q1 2012

Q2

Q3

Q4

Q1 2013

Q2

Q3

Q4

Q1 2014

Q2

Q3

Q4

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

6

Negative Output Gaps Around the World, But Much More “Room” in DMs 3 % 2 Fcst.

1 0 -1 -2 EM

-3

World -4 -5 1980

DM

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

7

Is the GLI breaking out of its range?

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

8

GLI in Expansion (since April)

0.10%

Expansion

Recovery 0.08%

Sep-12 Jul-12

0.06%

Jun-13

GLI acceleration

0.04%

Aug-13

0.02%

Apr-13

0.00%

Dec-12 Jan-13

-0.02% -0.04%

May-12

Feb-13

-0.06%

Slowdown

Contraction

-0.08% -0.20%

0.00%

0.20%

0.40%

0.60%

GLI growth Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

9

PMIs strong, China picking up bit now too

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

10

PMI and New Orders-to-Inventory spread improving too

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

11

Macro data: positive surprises are back

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

12

CAI rebounding

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

13

Sentiment robust

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

14

Homebuilding Has a Lot of Upside

Thousands

Thousands

2800

2800 Housing Starts Household Formation

2400

Household Formation Forecast

Demolitions* Housing Starts

2400

2000

2000

1600

1600

1200

1200

800

800

400

400

0

0 86

88

90

92

94

96

98

00

02

04

06

08

10

12

14

16

* Assumed demolition rate of 300,000 per year. Source: Department of Commerce. GS Global Investment Research.

Goldman Sachs Global Investment Research

15

Capital Spending Should Rebound

Net percent tightening credit -25

Percent change, year ago 15 10

0 5 25

0 -5

50

-10 75

Sr Loan Officer Opinion Survey (left) -15

Business Fixed Investment (right) 100 1991

-20 1994

1997

2000

2003

2006

2009

2012

Source: Federal Reserve Board. Department of Commerce.

Goldman Sachs Global Investment Research

16

SP 500 Tracking Expansion Pace; Wavefront GDP Growth Basket Ahead 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% -20%

Recent Slowdown (1-Feb-2013 to 30-Apr-13)

Recent Expansion (1-May-13 to current)

S&P 500

EM Equities

Aussie Dollar

Expansion

Slowdown

GS WF US Growth basket Contraction

Oil

Copper

Recovery

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

17

Cyclical Sectors in the Lead

20% 18%

Recent Slowdown (1-Feb-13 to 30-Apr-13)

16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

Recent Expansion (!-May-13 to current)

Expansion

Slowdown

Contraction

Utilities

Telcomm

IT

Financials

Healthcare

Staples

Discretionary

Industrials

Materials

Energy

-12%

Recovery

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

18

Current Activity Indicator Has Picked Up

Percent change, annual rate 4 Current Activity Indicator (CAI)

Percent change, annual rate 4

Housing Employment Consumer Industry

3

3

2

2

1

1

0

0

-1

-1 Jan 2012

Apr

Jul

Oct

Jan 2013

Apr

Jul

* First principal component of 25 key weekly and monthly US economic indicators. Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

19

Asset markets consistent with better US impulse (which is unfamiliar!)

100

25

bp

20

%

80

20

%

15 10

60

15

5

40

10

0

20

5

0

0

-5 -10 -15 -20 -20

-5 UST 10- Bund $/AUD year 10-year

$/JPY $/EM FX USD TWI

$/EUR

US Banks

US Defensives

SPX

Global Eurostoxx EM equity cyclicals (US market)

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

20

Different macro ‘shocks’ lead to different asset market impacts US Growth

European Growth

EM/China Growth

Tighter US Monetary

++?

+?

+?

-

Domestic cylicals

++

0

0

-

Global Cyclicals

+

+

+

-

Defensives

+?

0

0

-?

Non-US DM EM

+ +

++? +?

+? ++?

--

US yields

++

+

+

++

Non-US DM yields

+

++

+

++?

$

+?

-

-

+

$/JPY

+

0

+?

+

$/Europe

+?

- -?

-

+?

$/EM

+

0

-

++

EM vs DM

-

-

+

-

EM vs US

-

0

+

-

+? ++?

+ 0

+ 0

-? -?

Response of asset to shock:

Relative equity

FX

Rates

Stocks

US

Glob Cyc vs Def Dom Cyc vs Def

Note: Scale shows likely response to each shock ranging from most positive to most negative on the following scale: ++, ++?, +, +?, 0, -?, -, --?, --. For negative shocks, signs would be reversed. Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

21

‘Growth-driven’ rate rises do not usually stop equities, unless rates rise very rapidly

Using WF Growth Basket Average monthly changes

Using CAI

SPX (%)

10Y (bps)

No. of Months

SPX (%)

10Y (bps)

No. of Months

Rates+

0.97

20.1

143

0.97

20.1

143

Rates-

0.58

-19.4

198

0.58

-19.4

198

Growth+/Rates+

1.97

20.2

91

1.12

20.9

75

Growth +/ Rates -

1.78

-14.5

79

1.18

-19.9

98

Growth -/Rates +

-0.78

20.1

52

0.80

19.3

68

Growth -/Rates -

-0.21

-22.6

119

0.00

-18.9

100

Growth +/ Rates ++

0.17

52.8

12

0.12

52.0

10

Growth -/Rates ++

-1.67

45.3

4

-0.97

49.2

6

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

22

Shifting cross-currents help explain past market movements… Until May, markets were mostly consistent with improving US growth 16 14

bp

% chg, 12/30/12-5/21/13

May-June saw a US monetary ‘tightening’ shock

8 7

16

bp

% chg, 5/21/13-6/24/13

64

12

48

5

8

32

8

4

4

16

6

3

4

2

0

0

2

1

-4

-16

0

0

-8

-32

-2

-1

-4

-2

-12

-48

12

6

10

-6

-3 SPX

Eurostoxx

EM

USD TWI

UST 10year 9 (RHS)

-16

-64 SPX

Eurostoxx

EM

USD TWI

UST 10year (RHS)

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

23

Since June, asset markets have been more consistent with global growth improvement 10

25

% chg, 6/24/13-8/31/13

bp

8

20

6

15

4

10

2

5

0

0

-2

-5 SPX

Eurostoxx

EM

USD TWI

UST 10year (RHS)

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

24

WF Growth and ISM since 2010

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

25

WF Growth and ISM level (long history)

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

26

Discretionary leadership

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

27

Materials lag

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

28

Industrials are middling

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

29

Market sentiment higher

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

30

US Yields continue to lead; but equity market growth views are rising

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

31

Risk is retreating, while growth views support the market

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

32

EM equity has yet to fully participate in the cyclical upswing

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

33

EM Equity sell off and FX weakness on a rebound

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

34

US FCI elevated again

Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

35

2015 rate hikes still in the market

1.4%

Dec-2013 Fed Funds Dec-2014 Fed Funds Dec-2015 Fed Funds

1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Jan-13

Feb-13 Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

36

US growth risk improving, China growth risk improving, EM equity higher

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

37

Banks pull back was sharp, despite little shift elsewhere

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

38

Homebuilders pause …

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

39

… despite dramatic pick-up in the data …

Housing Swirlogram 5 Recovery

Expansion

4 Jan-11

Monthly change

3

Aug-13

2 Jan-05 1 0

Jan-07

Jan-03

-1 Jan-09 -2 -3

Slowdown

Contraction

-4 0

20

60 40 NAHB Housing Index

80

100

Source: Haver Analytics and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

40

… as mortgage rates rise

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

41

Small cap outperformance is widespread

Source: Bloomberg and Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research

42

Equity basket disclosure

The Securities Division of the firm may have been consulted as to the various components of the baskets of securities discussed in this report prior to their launch; however, none of this research, the conclusions expressed herein, nor the timing of this report was shared with the Securities Division.

Goldman Sachs Global Investment Research

43

Disclosure Appendix September 11, 2013

Disclosure Appendix

Analyst certification We, Noah Weisberger and Aleksandar Timcenko, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships.

Disclosures Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by Goldman, Sachs & Co. regarding Canadian equities and by Goldman, Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.

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Disclosure Appendix

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